There were 4 key factors to Ford outperforming third-quarter earnings expectations

Published Thu, Oct 29 202012:49 PM EDT

Key Points

Ford more than tripled Wall Street's consensus estimate and beat its own forecast for the third quarter.
New Ford CFO John Lawler attributed the company's better-than-expected performance to four "key" factors.
They included vehicle demand, positive pricing, lower structural costs and the company's financial arm.

Ford Motor more than tripled Wall Street's consensus estimate and beat its own forecast for the third quarter, sending shares of the company up as much as 7% Thursday morning. The automaker on Wednesday reported an adjusted EPS of 65 cents compared to 19 cents expected, according to Refinitiv. That was from total revenue of $37.5 billion, up $500 million from the third quarter of 2019. Ford shares were trading at around $8 per share during midday trading, up more than 4%. New Ford CFO John Lawler attributed the company's better-than-expected performance to four factors: vehicle demand, positive pricing, lower structural costs and the company's financial arm. "Those are the four key things that allowed us to beat for the quarter," he told reporters during a media briefing Wednesday. While Wall Street was impressed by Ford's third quarter earnings, they said the company still needs do a lot of work to get back on track. Here is a closer look at those four factors as well as what they mean for the company, which now expects a pretax profit in 2020, going forward. Demand Consumer demand for new vehicles has been more resilient than most expected in the depths of the coronavirus pandemic earlier this year, particularly on pickup trucks like the Ford F-Series. Ford was in a better position than its largest crosstown rival, General Motors , to capitalize on the continued demand. Its inventory levels were higher, giving customers more choices as GM was still building up its days supply following a 40-day union strike last year. "We saw demand come back much stronger, but the team executed very well with that," Lawler said. "We were able to produce more product and we were able to wholesale more product." Ford's factories that produce pickups as well as large Transit vans were nearly producing around the clock, including weekends, according to Lawler. The company also had 300 suppliers on expedited freight to get needed parts for production. A new study by CarGurus released Thursday found the coronavirus pandemic may have helped spur pickup truck sales over the course of 2020, and that new, younger shoppers are a main reason for the trend. Ford will face challenges in the fourth quarter with production of its F-150 pickup. The company expects to lose about 100,000 units as it steadily ramps up production of a redesigned version of the pickup. Pricing It's a simple case of supply and demand. The strength in demand combined with tighter inventory levels of vehicles due to factories being shuttered for two months in North America led to better pricing for the auto industry. That scenario contributed to 12.5% and 9.7% operational profit margins in North America and overall, respectively. The North American margin was Ford's best since the first quarter of 2016. "Stocks were low across the industry," Lawler said. "That gave us a tailwind on pricing." Ford is not expected to sustain those margins. The company has targets of at least 10% for North America and 8% globally under Ford CEO Jim Farley, who succeeded Jim Hackett effective Oct. 1. "On North America, I think it's really important for us to be clear, turnaround automotive operations and North America needs to absolutely be at 10% plus," Farley told investors Wednesday. "As you can see from the pricing and the mix, I think Ford is the strongest brand in the US industry, mainstream brand on pricing and mix." Due to costs related to new or redesigned vehicle launches toward the end of the year, the company forecast adjusted earnings for the fourth quarter to be between break even and a $500 million loss. Structural costs Ford is in the midst of an $11 billion restructuring that includes significant cost-cutting efforts and structural cost reductions that executives say are paying off during the coronavirus pandemic. The automaker's European operations are on track to deliver $1 billion of annual structural cost reductions, according to Lawler. Ford had a worldwide workforce of 190,000 people at the end of 2019 – down 9,000 from the previous year when the reduced salaried positions by 7,000 worldwide. The company has about 36,000 salaried employees in the U.S. In September, Ford said it wanted to eliminate at least 1,400 white-collar jobs through voluntary buyouts. A Ford spokesman Wednesday said that process is ongoing. The cuts and structural cost reductions under the $11 billion restructuring are expected to continue through 2022, included cash-related effects of $7 billion. As of the end of the third quarter, the company had spent $4.2 billion on its restructuring, including $1.5 billion in cash. Ford Credit Pricing power carried over to the used mar market as well, assisting auction values that produced better-than-expected earnings for Ford's financing arm. "The used car market remained very strong and that flowed through the auction values," Lawler said. High demand for used cars assists in higher pricing for leased vehicles financed through Ford Credit that are resold to used car dealers. Despite Ford Credit's revenue in the third quarter being down about 9% compared to a year earlier, the unit earned $1.1 billion, a 53% increase from the third quarter of 2019. The quarterly earnings before taxes were its highest since 2005. Wall Street reactions While Ford's third quarter performance was impressive, analysts believe Ford's new management team, led by Farley, still needs to prove itself. "Impressive 3Q20 results shouldn't be extrapolated, but do show signs that earnings power can be higher," RBC Capital Markets' Joseph Spak wrote in an investor note Tuesday. Morgan Stanley's Adam Jonas agrees: "While the factors driving OEM beats in 3Q should not be extrapolated (unusually low costs related to COVID, record mix, strong price, tight inventory, record used prices, etc…) the quarter won't stop an inflection in the narrative around Ford following years of underperformance vs. global peers and the market," he told investors Wednesday. CFRA's Garrett Nelson raised Ford's 12-month price target by $1 to $6 but maintained a sell opinion on the company. "We maintain a Sell following the stock's sharp rebound from the March low, as Ford remains in the middle of a multi-year restructuring and while Jim Farley has wasted no time shaking things up since taking the CEO reins earlier this month, we think Ford's turnaround is likely to take time," he told investors Tuesday.

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Ford beats the top and bottom line in Q3

Closing Bell

Ford Motor more than tripled Wall Street's consensus estimate and beat its own forecast for the third quarter, sending shares of the company up as much as 7% Thursday morning.

The automaker on Wednesday reported an adjusted EPS of 65 cents compared to 19 cents expected, according to Refinitiv. That was from total revenue of $37.5 billion, up $500 million from the third quarter of 2019.

Ford shares were trading at around $8 per share during midday trading, up more than 4%.